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Monograph : Encumbrances Contents
 
  7. Valid third party interest
     
   
a.

General

Some people may acquire interest in a property through occupying a property for a sufficiently long period of time without the owner's consent or by their contribution towards the purchase price. As these interests are not created by instruments in writing, they are not registrable under the Land Registration Ordinance. They would form unregistrable encumbrances on the property and the question then arises as to whether a purchaser can take free of these interests.

   
b.

Possessory title

An occupier acquires possessory title to property when he has enjoyed adverse possession of a property, that is, possession of the property without the owner's consent for the required period of time so that the owner's right of recovery of the property from the occupier is barred.

The Government is barred from recovery of property if there is adverse possession by an occupier for at least 60 years. If adverse possession of a property occurred before 1 July 1991, the owner is barred from recovering the property if the adverse possession has continued for at least 20 years. If adverse possession occurred after 1 July 1991, the owner is barred from recovering the property if adverse possession has continued for at least 12 years. It is therefore advisable for a prospective purchaser to inspect the property before purchase to ascertain the status of any occupier of the property.

   
c.

Unwritten equities

A person may acquire interest in a property by contributing towards the payment of the purchase price of the property or mortgage repayments. This kind of "equitable interest" is not registrable.

The common law rule is that a bona fide purchaser without actual or constructive notice of the unregistrable equitable interest may take free from the interest. However, if the equitable interest is created by an instrument in writing, the non-registration of the instrument may render the interest void as against a subsequent bona fide purchaser for valuable consideration.

The lack of actual notice of unregistrable equitable interest of an occupier who has contributed to the purchase price of the property is not sufficient to protect a purchaser. A purchaser may be found to have constructive notice of the existence of the equitable interest. One is said to have constructive notice of an equitable interest if such interest would have been discovered had he carried out such enquiries as a prudent purchaser would have made. Actual notice of occupation by person(s) other than the registered owner (for example, the registered owner’s spouse) should alert the purchaser to make enquiries as to the rights (if any) of such occupiers regarding the property (as in the case of Wong Chim Ying v Cheng Kam Wing [CACV000075/1990]).

The Law Society of Hong Kong has issued a practice direction stating that a purchaser should be advised to inspect the property to ascertain the identity and interests of all adult occupants (other than the registered owner) in the property and to secure written confirmation that such adult occupants have no rights or claim in the property.

   
d.

Estate duty charge on gifted property

Property disposed of by way of gift made within three years of the death of the donor shall be treated as the donor's assets for the purpose of estate duty assessment. According to Section 18 of the Estate Duty Ordinance (Cap. 111), a rateable part of the estate duty on an estate, in proportion to the value of any property which does not pass to the personal representative as such, shall be a first charge on the property in respect of which estate duty is leviable. Thus a gift of property made within three years of the donor's death may be subject to an estate duty charge under Section 18 of the Estate Duty Ordinance.

If the donor is still alive three years after the deed of gift of the property and the donee intends to sell the property, the donee (vendor) may be required to provide proof to the purchaser, such as a statutory declaration from the donor, confirming that the donor is still alive.

If the donor is still alive and the donee contracts to sell the property within three years of the deed of gift, the fact that there may be a latent charge on the property for payment of estate duty may render the title defeasible. It was held in Chan Fung Lan v Lai Wai Chuen [1997] CPR520 that the purchaser was not bound to accept the vendor's offer of an indemnity by way of retention of portion of the sale proceeds as proof of good title.

The law relating to a deed of gift is complicated. If there is a previous deed of gift shown registered in the land register with respect of a property, an estate agent should advise his clients to seek legal advice before entering into any provisional agreement for sale and purchase.

(Note: In respect of any person dying on or after 11 February 2006, no estate duty is payable.)

   
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